MSCI boost for Chinese firms listed in the US

Inclusion of Chinese ADRs in global trackers will see billions of dollars chasing these companies

PUBLISHED : Wednesday, 11 November, 2015, 6:12pm
UPDATED : Wednesday, 11 November, 2015, 6:55pm

New York-listed China stocks are set for a high-profile boost when MSCI for the first time adds Chinese American Depository Receipts (ADRs) on Thursday to key indices used by fund managers and investors to build portfolios and track performance.

Come November 30, when today’s changes first take effect, an estimated US$7 billion will move into 13-odd ADRs – likely to include heavyweights Alibaba and Baidu – as exchange traded funds which track the affected MSCI China and MSCI Emerging Markets indices reallocate their weightings to take account of the new members.

According to some bank analyst reports, another US$43 billion to US$68 billion managed by stock picker fund managers will also have to start chasing those stocks as active managers adjust their portfolios to keep pace with new weightings.

The shift to include overseas-listed Chinese firms into the world’s must referenced stock indices will increase both market cap and investor scrutiny of many Chinese household names. The move comes after an earlier effort to add domestic A-shares to MSCI indices was aborted amid accessibility concerns for foreign investors, still subject to Chinese trading quotas.

There are no such quota caps in the US, however. Today’s announcement means tech weightings in the MSCI China index will likely double while financial sector weightings will fall, said Leon Mirochnik, head of business developement of Hong Kong-based ETF manager Enhanced Investments Products.

Online travel agencies Ctrip and Qunar as well as education giant New Oriental are among the stocks slated for inclusion, with the average company market capitalisation to be around US$19 billion. Others include tech firms Netease and Qihoo 360, and online car trading site Autohome.

Reweighting of the MSCI indices will take place in two stages, half at the end of this month and half again at the end of May 2016.

Investors still hoping to trade on MSCI’s decision may be disappointed. After a sedate October, ADR daily trading volumes are now double the summer average, suggesting investors have wised up to the play, said Mirochnik, whose firm oversees an ADR-focused Chimerica tracker fund. ADR returns have also been outperforming mainland benchmarks.